Why The Subprime Crisis Has Not Affected Canada (Yet)

by Mike Holman

This post is part of a group writing project with the M-Network bloggers and friends. See the list of other posts in this project at the bottom of the post.

There has been a lot publicity around the subprime mortgage situation in the US. There are quite a few homeowners who have been or are about to be evicted from their houses because of a number of different factors. ARMs, NINJA loan, liar loans, fraudulent lending practices and worst of all…easy credit and low interest rates led to a situation where real estate prices went up and up. People who took the plunge five years ago with flipping houses made so much money that everyone wanted to get in on it. Now that the real estate prices are not going up anymore, the gravy train has stopped cold.

In Canada, we haven’t seen this situation (yet) and I think there are several reasons for this:

  1. Real estate prices haven’t gone up as much as in the US.
  2. Lending practices in Canada were stricter than in the US.
  3. Interest rates are stable.
  4. The economy is still going strong.

Real estate prices

Real estate prices did not rise as much in Canada as they have in the US over the last several years which might have helped prevent mass speculation. It’s easier to get excited about property investing/flipping when you see 30% annual returns compared to 10% returns which is roughly what we saw here in Toronto. I believe that people who are flipping properties are more likely to use excessive leverage in order to make more money. This works really well as long as the house goes up in value but if the house goes down (which is happening in the US) then the flipper might be in big trouble.

Stricter Lending Practices

The use of the word “stricter” is this case is a relative one. The last few years have seen changes in the mortgage market in Canada where you can buy a house with zero down, get a no interest mortgage and for those who are inclined to pay a smattering of interest there are 40 year amortization terms available. All of these features allow the Canadian home owner to increase the amount they borrow which will increase the odds of problems if any of the above factors come into play.

In the US it appears that anyone with a pulse and no paperwork or job or money could get a mortgage which obviously increases the odds that some of those borrowers won’t be able to make their payments. The availability of ARMs (Adjustable Rate Mortgages) is another product which can be very useful for some home owners but for some borrowers they were a way to get a house (for a few years at least) that they couldn’t afford. It was just recently that the US government passed legislation that makes lenders consider the payment after the mortgage reset (and not during the teaser rate period) when they look at the repayment ability of the borrower. Hard to believe that sort of common sense rule has to be legislated.

Interest Rates

This is another factor that applies to both Canada and the United States. While interest rates are higher than a couple of years ago, they are still fairly reasonable. If rates were to go up say 2% then I think that this will expose some sub-prime borrowers because they might not have any room to cut back in their budget to pay for a few more hundred dollars of interest each month. A borrower with a better credit rating would also feel the pinch with higher interest rates but they would likely have more flexibility in their budget.

Economy

The economy and job situation is still quite good in Canada which is not really different than the US but if we see a recession in either country and unemployment goes up, then that will certainly put more pressure on highly-leveraged home owners and foreclosure rates will go up.

Summary

Loose lending standards and rapidly increasing real estate values were the main reasons that led to some American borrowers taking out speculative mortgages that they couldn’t afford. Because these factors were not as prevalent in Canada I think that there are a lot less borrowers in Canada who are on the edge as far as being able to afford their mortgages. That said, lenders in Canada will still give borrowers a lot of mortgage which some people have taken advantage of, so if unemployment goes up and/or interest rates go up, we could still see a smaller version of the sub-prime mortgage crisis here in Canada.

The Globe and Mail recently had an excellent article ( free login required ) on subprime lending and some of the fraudulent sales methods used.

Finally I will leave you with link to a sub-prime mortgage discussion written by a senior employee at Pimco – it’s very informative and the format (the economist is talking with his pet rabbit) is very entertaining while at the same time, somewhat disturbing. 🙂

Other posts in this series

My Two Dollars posted My Thoughts On This Whole Mortgage Crisis And Why I Don’t Feel That Bad. This excellent post explains why David is a bit annoyed that people who overbought are getting helped by the government while fiscally responsible people (like him) don’t get anything.

Finance Freelance Life explains how renting a home and buying a home are not as different as they seem in Why renting is right for us right now.

Rocket Finance has a great post about his own real estate mistakes.

My Dollar Plan (yes, the one with 181 financial accounts) tells us a very unusual story of how she has an adjustable rate mortgage (ARM) and not only is she happy with it – she doesn’t blame her mortgage broker, the government or space aliens for the fact that she has one.

Moolanomy explains Debt-To-Income Ratio and Why It Matters. This post covers why you shouldn’t spend too much of your net income on your house.

Millionaire Money Habits tries to decide between investing in stocks or real estate in Catch a Falling Knife – Buying the Housing Slump.

PaidTwice wrote an interesting post on the “Can we afford it” mentality which gets into the problem of people deciding if they can afford something (such as a house) based entirely on the monthly payments.

Debt Free Revolution talks about how maybe it’s not such a good idea to take advantage of increased equity in your house by paying off credits cards with a HELOC. (Home equity line of credit).

Remodeling This Life wrote a post about how she and her husband bought a house and totally gutted it. This post brought bad some unpleasant memories for me because of our own fixer-upper experience. She has a fair bit of advice and warnings for anyone who wants to buy a fixer upper.

Being Frugal wrote Frugal Hacks For Your Home. Still not sure exactly what a “hack” is but maybe this post will tell me….

Plonkee Money asks why anyone outside the US should care about the subprime mortgage crisis.

Cash Money Life explains how mortgage escrow accounts work. These are more common in the US although I have heard of house insurance payments being combined with mortgage payments. In a related article he discusses how his mortgage payment dropped recently because of changes in the escrow liability amounts.

Single Guy Money talks about the real cost of home ownership.

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{ 41 comments… read them below or add one }

1 Emily

Great article, Mike! Sorry to bring back such bad memories for you. I guess we’re totally crazy because here we are talking about buying another one!

2 moneygardener

One of the main reasons that this happened in the U.S. was that interest rates were brought down to (around 1%?) in the 911 era. Out of curiousity, do you know how low Canadian rates went at that time?

3 Four Pillars

Thanks Emily. It’s probably good therapy for me…

I guess we?re totally crazy because here we are talking about buying another one!

I would have to say that statement confirms it! 🙂

MG – good point! 1% is practically free… I don’t know what our rates were at that time – I know in 2003 I had a 1 yr mortgage for 3.1% which is one of the lowest that I had heard of – I don’t recall them being especially low in 2001 or 2002 although they were dropping (which they normally do when I’m locked in).

If their rates were 2-3% lower than ours then that would certainly help explain more borrowing and increased real estate prices.

4 David

Thanks so much for including me!

5 plonkee

Our interest rates in the UK have never been as low as the US. In addition, pretty much all UK banks own their own mortgage loans still. It shouldn’t have affected us too much.

But the credit crunch had additional implications, and caused the first run on a high street bank for years. It’s more of an incident rather than a crisis over here, fortunately.

6 Four Pillars

Just for fun I played around with a mortgage calculator. If you have a $200k mortgage at 5% (I’m assuming this was the Canadian rate in 2001) the monthly payment was $1170. But if the rates were only 1% then for the same monthly payment you could borrow $310k which is a huge difference.

7 Nobleea

I think you made some good points. The converse is that in areas of canada where we did get 30%+ increases in house prices per year, we are now seeing prices dropping as speculators try and get out (calgary, edmonton, likely saskatoon next)

8 Traciatim

I beg to differ, the reason Canadians aren’t seeing the turn around they are in the states is because people here are still under the delusion that real estate always goes up in value.

Lending practices are getting more lax, property prices are insane in some areas. As soon as people come to the realization that 500K for a little starter home with a stove on the front porch on only 3700 sq feet of land is not a good deal, we will be USA 2.0.

http://tinyurl.com/23va3q

Oh wait, I forgot . . . “It’s different this time.”

9 Four Pillars

Nobleea – I can definitely see how some areas are more likely to be in a bubble situation ie Vancouver.

Traciatim – maybe the stove didn’t fit through the front door? 🙂

10 moneygardener

Traciatim raises some good points. It will be interesting to see what happens to certain markets in Canada as well.

I do think though that the extremely low rate in the U.S. is what caused 75% of the problem.

11 Four Pillars

MG – Most of the bad loans were made in the last two years where the interest rates were not super low. I do agree with you that low interest rates were part of the problem but I think loose lending standards and buyers who didn’t have any common sense were also a big part of the problem.

Everyone who buys a house with a big mortgage has to be aware that the rates can go up.

Mike

12 moneygardener

4P,
Low Rates + loose lending + very low rates influence on friends success + 911 nesting = housing bubble

13 fathersez

Wouldn’t greed have played a role?

Maybe there was a little more of it south.

14 Four Pillars

FS – I find it hard to believe that Canadians are less greedy than Americans… 🙂

Mike

15 Gates VP

Good summary Mike, but I think you missed an extra point and it’s actually a step beyond the lower interest rates during the critical period (post-September 2002). It’s the banking situation in the US. Banks here are actually competitive!

I went to grab money from my Bank of America account this morning (just sounds dirty :P) and there’s a referral program to the tune of $25 or $50 and sign-up bonus for new customers. They actually had a handout “Don’t pay us to cash your checks, open up an account with us to get free cashing and a $25 sign-up bonus”. And if you’re a MyMoneyBlog reader, you’re familiar with the plethora of referral and sign-up bonuses.

When was the last time one of the Big 5 (or 6 or 7) actually gave you anything outside of a few Air Miles?

And that’s a big difference. None of the banks the primary mortgage lenders, want to take that sub-prime and ARM risk in Canada. But major banks in the US took all kinds of risks. Now, there was definitely some shady practices going on: people were getting mortgages without even doing a credit check! But major banks were still underwriting these loans and some of them were even pushing them.

The Canadian banks won’t do that. They just don’t need to. I mean really, if they all want a few more bucks, one of them can start taking on risky loans or they can all just sit around a dinner table and set new banking fees then roll dice to see who gets to roll out the new fess first.

Add to that, Canada’s lack of a tax deduction for mortgage interest and you have less push towards owning a home.

So less risky banks and less momentum towards a home seem to be part and parcel with the lower interest rate deal.

Side note: Calgary and Edmonton were definitely over-priced in last February. But it’s still going to start at 225k or 250k (instead of 300k) b/c the market there is so strong. If a couple of 24-year old McManagers can afford the place (and they can b/c they’re making 43k), then the places will sell. I honestly expect to see some price drops and some salary increases to make up the difference.

As to Vancouver and TO, they’re not really “overpriced”, I tend to refer to them as premium. They’re really no different than places in NY or the Bay Area. When you live in an international quality city, you’re going to pay more for that housing.

16 benny lava

echoing traciatim and four pillars — I am in Vancouver, and there’s little doubt in my mind that we will see a significant correction. When it starts and how rapid is anyone’s guess, but it is nusto wacko here — the following are my indicators

1. rents and prices totally out of whack — to purchase what I rent would cost 2-3times my rent, plus a hefty downpayment

2. cap rate on “investor” properties is at most 4%. Many are not even cash flow positive.

3. General frenzy — everyone seems to believe that 5-20% a year increases are the normal, permanent state of affairs. This leads to a self perpetuating postive feedback loop. Ie if you don’t buy RIGHT NOW you will lose TENS OF THOUSANDS OF DOLLARS a MONTH. Once that cycle broken and folks aren’t making 100% a month on their modest downpayments, the frenzy will end.

4. Amateur speculator/investors. I personally know:

a) a middle aged guy with no experience in real estate who has given up his day job to flip properties. He has my vote as “2009’s hot potato holder”, and 2010’s “Divorced Dad of the Year”

b) a 25 year old cubicle jockey in my office who owns multiple properties, which he intends to flip. One is rented to stable tenants, one is intermittently rented to bad tenants, and the third he has not even bothered to rent them to create any cash flow, given the hassle with the second property.

c) a 2nd year undergrad student who bought the only thing she could afford — an aging 1br condo in Maple Ridge — which is a ridiculous commute to UBC — plus she can’t afford a car. But renting? no way! She’s generating wealth!

5. A huge amount of condo supply coming onto the market in the next couple of years. Even Re Max is of the opinion that about half of the presales are owned by speculators. And despite sentiment to the contrary, actual net migration to the city is pretty slight. There are way more units coming on stream that actual occupiers.

Folks are way way overextended here. No it’s not subprime per se, but I guarantee you there are second and third loans to generate downpayments that were undisclosed to the lenders (who likely didn’t care to enquire anyway), increasing reliance on 30-40 year mortgages, rapidly mounting LOC’s and credit card bills, and some seriously stressed owners.

Once the spiral of ever increasing prices flattens,
folks like my investor colleagues will head for the exits en masse.

Subprime? No, but a financial hangover for sure.

17 Four Pillars

Thanks for the great comment Benny – keep us updated.

Mike

18 Patrick

Great article. I hope the subprime mess doesn’t hit Canada like it hit the US. It has affected hundreds of thousands of lives and even the world economy. Things will shake out, but it will take awhile to correct itself.

Thanks for the mention. 🙂

19 Four Pillars

Thanks Patrick – I hope we don’t see it here as well.

Mike

20 Y HAT

Canada’s real estate market is quite different than our southern neighbour’s, which should protect us from a US-style sub-prime blow up.

First, Canada’s subprime market is considerably smaller than in the US. Over 20% of all loan originations in the States during the last couple years where in the sub-prime space; Canada’s sub-prime market, in the other hand, is considerably smaller (~5%).

Second, our real estate market is considerably less sophisticated than in the US: products such as 40 year amortization loans are a relatively new phenomenon here and the securitization of mortgages is not as prevalent.

21 Four Pillars

Some good points Gates – it’s true that the banks here are not as competitive which might have saved them (and borrowers) from some misery.

I agree about Toronto & Vancouver – I’ve always thought that Toronto was pretty cheap compared to cities like Boston.

The lack of tax deduction is a point I should have included as well.

I might need a follow up post with all these other ideas!

22 telly

I have to agree with Benny (and Traciatim) on this one.

On the subprime issue, I think there’s a lot more going on in Canada than we know, just as there was in the US but it wasn’t talked about until RE prices started to fall. It was the falling prices (RE bubble bursting) that caused the subprime situation to become a mess. If prices continued to climb, people would have continued to borrow against the gains they saw (like many in Canada are doing today).

IMO, it’s foolish to think that we’re immune to the inevitability of falling real estate valuation in Canada. It makes no sense to compare prices in one city to the next to determine whether RE is properly valued. What matters is corresponding affordability and rents. And in some cities in Canada, those numbers are way out of whack and unsustainable.

23 benny lava

telly —

Yup, subprime isn’t the problem. It’s highly leveraged lending to risky debtors. All is well when prices are rising and the ability to refinance keeps the wolf from the door. Once prices stop rising, that gravy train ends and the bills must be paid. If prices fall, then these marginal debtors find they have both payments that they struggle with and a loan that exceeds the value of the asset. Most will struggle through and painfully make their payments and juggle expenses. Some will have no choice but to go bankrupt or be foreclosed on.

This will likely not result in a “subprime” mess here — if by that one means a freezing of debt markets due to impaired collateral and poorly valued debt instruments. CMHC insurance will safeguard against that.

However, poor lending practices will result in demand drying up and supply increasing, and a whole lot of supply coming on stream that does not suit anyone’s (except a pyramid of speculators) needs (ie the 5oo sf condo), condo towers in outer Surrey etc. Also the “wealth effect” of consumer spending of paper rich consumers will dry up. The knock on effects are obvious.

Fun times ahead.

24 Four Pillars

Telly & Benny – there’s no doubt that housing prices can go down, but I’m not sure why that would cause more foreclosures unless the mortgages are the ARMs that were popular in the US. People don’t lose their homes because they go down in value, it’s because they can’t make the payments. I would think rising interest rates and/or job losses are more likely predictors of increased foreclosures than the value of the houses.

25 benny lava

It’s not ARMs — ARMs have always been more popular here than in the US. And short term rates are heading down. ARMs are a different thing than what we are talking about here. (And by ARMs perhaps you mean interest only or negative amortization?)

It’s the overextended leverage in the expectation of ever increasing prices. Killer mortgage payments with a 40 year term on an asset that ISN’T appreciating is a killer. And at some point in that 40 year term the family that stretched to get into that overleveraged mortgage is going to face higher rates. Options are to stop spending on everything else, drain extended family wealth, or bail. And if the debtor is upsidedown on the mortgage, bk, and leave the bank with impaired collateral.

If a lot of that leverage was wishful thinking, lenders have worse debtors than they care to admit. As I say, most will struggle through, but the effect is always felt at the margins. In a number of markets here, I think there is a piper to be paid. There’s no free lunch, after all.

26 Four Pillars

Benny – what is your definition of an ARM? I’ve never heard of them being offered here.

I agree that overextended leverage is one of the key problems.

Mike

27 benny lava

adjustable rate = variable rate

Rate floats with prime. Common in canada. Adjustments in rate don’t directly impact monthly payments (unless interest rates spike dramatically) — just the proportion of interest paid as part of the monthly payment.

At least that’s the way I’ve understood it. Perhaps I’ve misunderstood, though.

The i/o neg/am is the toxic situation. That is, either no principal is being paid, or monthly payments are artificially low and the unpaid interest is tacked onto principal. I think a lot of folks in the more stressed markets are effectively in this camp, not via their primary mortgage, but through the mosaic of LOCs, loans and other debt products that have to be relied on simply to be a homeowner. Basically, if you have to tap a LOC to keep up with the monthly payment, you had to borrow a significant sum to make your home “livable”, or you are paying an undisclosed loan that was the basis of your downpayment, you are de facto “subprime”. There’s a lot of this, I would bet.

Debt is the new wealth. Until it isn’t.

28 Traciatim

Hey Benny Lava, the ARM in the states works a little differently than what you are thinking.

For example, a common product on a 30 year amortization in the USA was the 2/28 ARM. This would mean you would get an introductory interest rate for 2 years, and then !KABLAM! your rate spikes for an even higher than a conventional mortgage for the next 28 years.

You actually can get rates like this in Canada through a mortgage broker if you want. Canequity.com lists it as an introductory rate where you would get a low rate for 3 months (not too bad. Then there are companies like MyNext.com which are doing liar loans (states income, with NO PROOF) and the intro rates for a year and even a ‘low payment’ mortgage that you pay less somehow, apparently by just paying the interest and never getting ahead.

29 Four Pillars

Bottom line is that if you are over-leveraged and if your payments go up significantly (for whatever reason) then you will be in a world of hurt!

Mike

30 Gates VP

Hey look, Benny’s probably right about the Vancouver market, but that’s simply not happening everywhere. And while Vancouver may seem overpriced, it still probably has a base value of 2x the price of an “equivalent” home in a non-premium city.

Tim says: to purchase what I rent would cost 2-3 times my rent, plus a hefty downpayment
Which is definitely high, but I don’t think that 2x is really high. I’ll explain.

If rent = mortgage (i.e.: 1x), then tons of people are going to buy, and it’s hard not to when renting is “throwing your money away”.

If mortgage = 1.5x rent, that’s like a $1500 mortgage to a $1000 rent. But even then, many people figure that they’ll be “making money”, when the interest portion of the $1500 dips below the $1000 rent they would have paid. And hey “my mortgage won’t go up but my rent will”

Now when you get to the 2x range, then it’s pretty obvious to basically everybody that renting is more efficient. However, if you’re living in Vancouver or Toronto, you’re accepting of this fact and you probably still buy.

I’m not endorsing this math. I couldn’t justify owning in Edmonton or Winnipeg or even in “under-priced” Kansas City. But this is what I see of the “popular opinion”.

I agree that we’re due for some downward correction, but you’re also not going to see home prices in Edmonton drop into 2003 levels.

31 sam

great article! if you dont mind i’d like to link to your article and make a summary of it and all the coments made- there is an astounding lack of information on te canadian experience.

do any of you know if canada has a secondary mortgage industry that is similar to Fannie Mae/Freddie Mac in the states?

CMHC maybe? but do they buy and trade mortgages?

32 Four Pillars

Sam, be my guest.

I don’t know if there is a secondary market in Canada – that is an interesting question.

I don’t think CMHC trades mortgages – I would think they only insure them – but I’m not 100% sure.

Mike

33 sam

I’m thinking…
The US has so much more liquidity in their market because
1) They have a three tiered system (i.e. competitive banks, 2ndary mortgage industry, and all those little firms that originate loans);
2) the sheer vastness of the market. The US market is plainly just larger and so you can buy/sell more mortgage backed securities and they in itself become a commodity (smething that has not been fully realized in Canada); and
3) The commodification of buyinjg/selling/trading/ MBS make the market so competitive and furthermore forces of globalization make it easier, and is being realized that the flow of money is much more profitable than the flow of goods. The everyday person now is getting into the stock market and that itself on a grande scale is insane.

SO, if you have so much liquidity and volatility as I have described AND the US is soooo entrnched in the global market (aka they basically rely on a network for economic sustainaiblity/success) than it just magnifies the problem of subprime lending and subsequent defaults.

So I think what I am tryig to say is that Canada does not have a visible problem (yet) because
1)we have a more uniform (and thereforfe stricter) mortgage system which is dominated by banks that are very moderate in personality (mirroring what was said earlier about competitive banks),
2) Our market is smaller and thus not commodified as much as the US market
3) we arfe not so connected to the world market (we are, but with different markets. we have a close connection to the pacific rim, such as China, but even China themselves just recently got into the global arena- they cut themselves off economically for a long time)

So if we’re talking about the question of when is it going to happen in Canadam we have to just wait until the size of the market is big enough for these things to get competitive.

oh, and also a note about buying and trading money- I have such a fascination wit this because when it REALLY comes down to it is the stock market not reliant on consumer/buyer CONFIDENCE? Like, if all confidence goes down does the market not crash? The market is so elusive and there’s so little grounding/meat in the actual system. So I find it so risky to be buying/selling/trading MBS as if they were any other kind of commodity b/c in the end mbs represents a package of people in homes. and the slightest thing that scerws up the market affects people in their homes and causes homelessness.

Please comment on my long winded msg. I have absolutely NO background in finance or real estate or houjsing. I’ve just becoe fasinated withit lately and have done a lot og wikipedia-ing and googling so my knowledge it it isn’t really up to snuff.

34 Four Pillars

Sam, that’s a great comment – you seem to be quite knowledgeable.

35 Gates VP

Hey Sam;

Good points. You talk about consumer confidence, but it’s always confidence tinged with reality (or the converse). Confidence and reality are constantly converging (and diverging).

But when it comes to this quote
2) Our market is smaller and thus not commodified as much as the US market
There’s a very big difference between the nature of the Canadian and US economies. The US is not self-sufficient, they have a large trade deficit, i.e.: they are importing more than they export.

If we drew a giant 10 ft wall across the 49th and stopped all goods from crossing the border, Canada would be OK. We don’t have enough factories for finished goods, but we have enough natural resources: food, electricity, wood, etc. The US would be in big trouble, they already have an issue with blackouts, they don’t enough wood for new developments.

The US economy is going downhill (and I’m saying this from Kansas City!). Canada is going along for some of the ride. But we have good fundamentals and good consumer confidence. And why not? We’re running a big surplus, Alberta is becoming a giant source of money generation. Saskatchewan has new oil, they’re even finding stuff off the eastern coast. There are tons of jobs in the Canadian economy and therefore lots of consumer confidence.

The US has the problem of massive amounts of debt and nothing to make up the debt. They’re bleeding money on this war and they have a serious reputation on the international markets.

Consumer confidence here in the US is low. And it should be. This stimulus package is a joke, but almost nobody sees it.

Canada is in a way better place than the US right now financially. Our housing market may be in a small boom (especially in Alberta), but nowhere near the size it is here in the US.

36 telly

I would have to disagree Gates. We get this same cocky attitude (read: inferiority complex) as Canadians every time the US economy starts to slide.

If Canada built that wall, who would be buying all the oil and commodities that’s making Canada’s economy so hot currently? We need the US just as much as (or more than) they need us.

Canada’s economy is still one grain in a big sandbox.

Maybe I’m wrong but I don’t feel as individuals, Canadians are doing much better in the way of savings or avoiding debt than our US neighbours (I just think it hasn’t surfaced yet). And I think the next US president will right a lot of the wrongs that Bush f-ed up. We know they can’t do much worse….

37 Four Pillars

Telly – I agree with you. Although Canada is the largest trading partner of the US, they are much more important to us then we are to them.

I personally don’t feel that the average Canadian is any more or less financially responsible than the average American. Maybe because our banking system is different and interest rates didn’t get as low here the average Canadian didn’t get as much opportunity to screw up but it wasn’t for lack of trying!

Mike

38 telly

I agree Mike. And you’re right in that our banking policies, as well as less competition have saved many of us to some extent but I still believe that the rising RE markets we’re experiencing in Canada are masking problems yet to come. Just the way they did in the US a couple years back.

Great discussion by the way…as I knew it would be. 🙂

39 Traciatim

I just think the major thing comes down to sustainability of price increases. Incomes between 2004 and 2005 of all families in Canada according to ‘The Daily’ increased 2.1% (March 29th, 2007 edition). If home prices are appreciating at 15% for an extended period of time, more and more families will be priced out of the market. Eventually something has to give, whether it be stagnation or price depreciation.

For instance, if we look at a few of the median salaries for some cities vs. the average home selling price (I can’t find median home selling price) from the CREA website we see some interesting results.

I’m going be falling back on the rule of thumb that home prices should be around 2.5 times your annual family income. I realize this isn’t a rule for everyone, but the general guideline keeps your budget in check when shopping.

As an example of what I’ve done here I’ll be showing one example of my home city in Saint John, NB. The Daily lists the annual median income for 2005 as $57000 in Saint John. If I add in the average Canadian income increase of 2.1% for two years we get an annual 2007 income of around 59400. This puts the ‘target home price’ at somewhere between 118,800 and 178,200 (2 – 3 times median salaries). The CREA website shows my homes city average selling price as $135,193. This puts the average home at around 2.3 times median salary; making a nice affordable city. I Don’t mean to toot my own horn, no one wants to live here cause it is known as the anus of Canada for a reason.

Lets look at some other cities:

Halifax, NS
Median 2007 Income: 67400
Target Home Price: 134,800 – 202,200
Actual Average Selling: 209,000
Cost Ratio: 3.1

Montreal, QC
Median 2007 Income: 61100
Target Home Price: 122,200 – 183,300
Actual Average Selling: 242,000
Cost Ratio: 3.96

Toronto, ON
Median 2007 Income: 64400
Target Home Price: 128,800 – 193,200
Actual Average Selling: 395,000
Cost Ratio: 6.1!!!

Saskatoon, SK
Median 2007 Income: 66300
Target Home Price: 132,600 – 198,900
Actual Average Selling: 255,000
Cost Ratio: 3.8

Calgary, AB
Median 2007 Income: 78600
Target Home Price: 157,200 – 235,800
Actual Average Selling: 400,000
Cost Ratio: 5.1

Vancouver, BC
Median 2007 Income: 61300
Target Home Price: 122,600 – 183,900
Actual Average Selling: 566,000
Cost Ratio: 9.2, holy freakin cow!

It’s interesting to see the numbers in front of you. I think the prices in a few places are simply out of control. That can’t be sustained for long periods of time for obvious reasons.

40 sam

Traciatim:
That’s a wealth of information- where did you get those numbers from CMHC + census???
i need to quote those somewhere- thosenumbers for vancouver and TO are insane

and do those numbers account for METRO Vancouver and greater toronto? or just the city proper??

41 Four Pillars

Traciatim – great set of info!

One thing I’ve always wondered about is how much down payment people have when they buy a house.

It’s easy to look at the average income and average sale price for a house and draw conclusions but the fact is that a lot of people who have been in the market for a while might have a lot of equity in their house so even if their house is worth 5 or 6 times their salary, that might not be a big deal.

Great comparison of the cities though.

Mike

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